Today the Senate will vote on final passage of the “China currency bill.”
OCTOBER 11, 2011
Wall Street Journal
Avoiding Smoot-Hawley Redux
My Senate colleagues shouldn't be provoking a trade war with China
By BOB CORKER

There's no question about it: China manipulates its currency. The value of the yuan is largely determined not by market forces but by a "managed float." Beijing sets a target range within which the yuan can be converted into U.S. dollars via markets in Hong Kong. Under most analyses of purchasing power parity, the yuan should probably be at a higher value relative to the dollar.

None of these statements are controversial. The real questions are: What does the managed float mean for America, and what should be done about it?

On the former, the managed float of the yuan means that U.S. imports from China are cheaper than they would otherwise be. It also means that China sits on large dollar reserves that get funneled back into U.S. financial assets (mainly Treasuries and mortgage-backed securities), putting downward pressure on U.S. interest rates.

In addition, it means that if the U.S. could produce the same goods and services at the same price as China, we would be at a comparative disadvantage. The reality, of course, is that the U.S. does not produce the same goods and services at the same price. This is partially because China's labor costs are about one-thirtieth of U.S. labor costs, and the U.S. has come to specialize in higher-tech production and service industries. It's also because the U.S. does not have nearly as friendly a business environment for manufacturing as we should.

On the latter question—what should we do about this—the answer is: not start a trade war.
Unfortunately that would be the unintended consequence of the Currency Exchange Rate Oversight Reform Act. The bill seeks to create U.S. jobs by imposing tariffs on imports from China in the amount that China undervalues its currency. The bill's actual effect, though, won't be to bring production from China to the U.S.—only to make the things that we buy from China more expensive.

Why? Because China is unlikely to respond to a tariff on all imports by doing what we demand they do. More likely, China would retaliate with tariffs of its own and by cutting off business with U.S. companies. Rather than spending $480 billion to purchase 4,300 aircraft produced by Boeing in the U.S. over the next 20 years, for example, China could take that business to Airbus and make France the world's leader in aviation.

In 2010, the U.S. imported $365 billion worth of goods from China. This bill would potentially inflate the price U.S. consumers and businesses paid for those items by 20%-30%. That's about $60 billion-$100 billion in extra costs taken from the U.S. economy in the middle of a recession.

Business leaders know this legislation won't create American jobs, which is why organizations like the Chamber of Commerce, Business Roundtable, Club for Growth, National Retail Federation and many others are joining together to oppose it.

If we want to compete with China in manufacturing, we need to create a better business climate for manufacturing in the U.S. We should also address China's disregard for intellectual property rights, push China to end preferential procurement policies and to invest in manufacturing plants in the U.S., and ensure that we maintain access to China's 1.3 billion consumers. These are the right policy responses toward Beijing.

China's currency has increased about 30% relative to the dollar in recent years, and it will likely rise more through internal pressures. Exports to China have increased six-fold in just the past few years, and China has continued to open up its financial system to modernization. If China were to change course and throw up more barriers, we would then be justified in a more aggressive approach. But a trade war is not a good answer, especially in the midst of a recession and an unemployment crisis. We should be working to strengthen our exports, to hold China accountable at the World Trade Organization, and to demand protection of intellectual-property rights.

In 1930, Congress passed the Smoot-Hawley Tariff Act. In a moment of populism, legislators reached for simple answers to complex problems. The result was a deeper depression and a decade of increased joblessness. We must not repeat these mistakes.

5
comments:

Anonymous
said...

"It's also because the U.S. does not have nearly as friendly a business environment for manufacturing as we should....If we want to compete with China in manufacturing, we need to create a better business climate for manufacturing in the U.S."

Translation:

In the US, we're still required to abide by child-labor laws and workplace safety regulations, we have to pay a (pathetic) minimum wage, and we're not even allowed to force our employees to work as many hours a day and as many days a week as we want without overtime!

...organizations like the Chamber of Commerce, Business Roundtable, Club for Growth, National Retail Federation and many others are joining together to oppose it.

Oh please, these groups represent multi-national corporate owners and THEIR profits. The last thing they are worried about are American jobs. Tariffs would cut into profits! Every solution the right wing has to this problem is that the US must change-not China--Communist China.

I've heard the same argument from conservative friends regarding illegal immigrant employers like farming. "If only Americans weren't too lazy to work for a dollar an hour, we wouldn't have this problem!"

It's worth noting that China's economy is just as fragile as our own right now. Yes, they are an export powerhouse, but they are staring down housing and tech bubbles, and exports are slipping. We probably won't be able to force another world power to play by our rules at their own expense, but every large economy now is going to be looking for increasingly desperate means to claw their way to the top.

It's all going to crash and burn as the oligarchs finish their rape of the planet and escape to their offshore luxury enclaves, surrounded by walls and mercenary security guards. Literally the crime of the century.And the talking heads on TV will cheer them on.

The dirty fucking hippies were right all along, but who listens to dirty fucking hippies?

Oh not this condescending tripe on globalization and "comparitive advantage" bullshit again....

Yeah the COC and globalists ( read that as rent-seeking corporatists seeking to make a killing through wage arbitrage ) are worried about a trade war? The country with the trade surplus should be worried about a "trade war", not the net importer. Hell the US would be better off the less it traded: If it suffers a net loss on every deal it makes, does it expect to make up for it in volume? Of course not. It's about protecting the market share and ever fattening bottom line of US companies producing there

"and ensure that we maintain access to China's 1.3 billion consumers"

Yeah right. By "We" they mean to say US based multinationals. Forget about the canard regarding selling aircraft as well. China demands a lot of production of US planes they purchase, severly eroding whatever "export" metric globalists try to whitewash their way out of the trade deficit with.

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